Buy Union Bank; target of Rs 320: Motilal Oswal

“Union Bank of India 3QFY12 PAT stood at ~INR2b (v/s est. of 5.1b). While operating profit was 4% above est., higher than expected provisions (INR9.7b v/s est. of 4.9b) due to provision of ~INR3.5b on restructured loans (of which one large account constituted 80%+) led to lower than est. During the quarter bank restructured loan of INR20.4b (130bp of overall loans) of which INR14b was on account of one large account in telecom segment. Bank booked NPV loss of INR3.5b on the loan restructured during the quarter.”

“Management mentioned that it had some application pending for restructuring which would take place in 4QFY12; thereby it would be the key number to be watched for. During the quarter bank made provision of INR4.2b towards NPA and core credit cost for quarter stood at 1.1% v/s 1.35% in 2QFY12 and 0.9% in FY11. NII grew 7% QoQ and 10%YoY to INR17.8b (v/s. est. of INR17.1b), however it included INR900m on account of interest on IT refund adjusted for which NII was in-line with est. Reported margins improved 10bp QoQ to 3.3%. While cost of funds increased 18bp QoQ, yield on funds were up 37bp QoQ leading to margin expansion. Strong growth in PSL segment in 4QFY12 may lead to some moderation in margins in 4QFY12. Mgmt re-iterated its guidance for margins of 3.2% for FY12. Nevertheless, we model in ~20bp decline in margins for FY12 v/s guidance of ~15bp.”

“While core-operating performance remained strong, reported PAT was significantly below est. due to one-off provisioning on one large account being referred to CDR. Sequential improvement in margin and strong growth in fee income - is a key positive. We model in NIM decline of 20bp in FY12 v/s management guidance of 15bp and expect it to be stable in FY13. Fee income growth picked up during the quarter and we model in fee income growth of 10% over FY12/13 leading operating profit CAGR of 17%+ over FY12/13. Slippages during the quarter declined significantly to INR5.7b as against INR18.2b a quarter ago - which was comforting as UNBK was grappling with asset quality issues over past few quarters leading to underperformance. While improvement in one quarter cannot be seen as trend, management remains confident of containing slippages and coupled with improvement in recoveries and up-gradations, GNPA in absolute terms is expected to decline going forward - which is a positive.”

“We model in slippage ratio of ~2.5% and 2% in FY12 and FY13 and credit cost of 100bp and 90bp for FY12 and FY13 respectively. Fall in slippages and credit cost coupled with strong core income growth is expected to drive strong earnings growth (65%+) for FY13. Increased restructuring (INR20b) - was largely expected, however NPV loss came as a negative surprise and would be a key number to watch for as there may be some more restructuring over next couple of quarters. Mgmt has guided for additional restructuring of INR12-13b in 4QFY12 of which INR5-6b will be 4-5 CDR cases. Guidance does not include SEB restructuring if at all. We expect RoA to be 0.6% for FY12 and improve to 0.8% for FY13 whereas RoE is expected to be 12.2% and 18.2% over FY12/ 13, EPS of INR27.1 in FY12 and INR45.4 in FY13. BV is expected to be INR232 in FY12 and INR268 in FY13. Stock trades at 0.9x BV FY12 and 0.8x BV FY13. Maintain Buy,” says Motilal Oswal research report.

FIIs holding more than 30% in Indian cos

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